Sunday, April 15, 2012

Resurrecting Eurozone's Ailing Economy?

Greeks were prepared to celebrate Orthodox Easter in a manner befitting the country's crisis-hit economy.

Stung by higher transport costs and income falls, many Greeks opted to stay at home while a leading trade association said purchases for the country's foremost religious festival had been the poorest in a decade.

A tradition for political leaders to visit army barracks on Easter Sunday was also curtailed, with the exception of the head of state, Carolos Papoulias, who is to lunch with paratroopers in the northern city of Naousa.

Still, most Greeks families plan to serve roast lamb for the traditional Sunday feast that brings the Lenten fast to a close.

"We're out of lamb and will soon be out of goat too," Kleanthis Tsironis, head of the Athens meat market, told Flash Radio yesterday.

And a government plane was sent to bring back the holy flame that burns in the Church of the Holy Sepulchre in Jersualem, marking the resurrection of Jesus Christ.

Private carrier Aegean Airlines will then take the flame on to Greece's second city of Thessaloniki and the islands of Corfu, Lesbos, Mykonos, Santorini and Rhodes on scheduled flights.

Though 700,000 people drove out of the capital ahead of the four-day weekend this was a 46-per cent fall from last year according to traffic police, while another 84,000 sailed from the main ports from Thursday, the coastguard said.

The exodus by ferry was stymied by a two-day sailors' strike during the week.

Salaries and pensions in Greece have been slashed by up to 40 per cent in the last two years under an economic overhaul pursued by the debt-hit government in return for loans from the European Union and the International Monetary Fund.

Taxes have also been repeatedly hiked and over a million people are jobless according to official figures, with the economy mired in a fifth year of recession.

"We can say with certainty that Greeks are being put through the poorest Easter of the last decade," the national confederation of Greek commerce (Esee) said in a statement this week.

The confederation said retail trade turnover was down 15 per cent in the first two weeks of April when most Greeks stock up on preparations for the traditional feast on Easter Sunday.

Demand for clothes and shoes - traditional Easter gifts for children - fell by 18-21 per cent while sales figures for food and drink were also down by around 10 percent, the confederation said.

It is indeed an austere Easter. The Globe and Mail reports that Greece's unemployment rate increased to 21.8 per cent in January, with nearly 350,000 people losing their jobs in the past year while the debt-strapped country's economy remains stuck in a depression. With youth unemployment hovering around 50%, hordes of young people are saying goodbye to Greece.

A friend of mine noted that the bulk of the job losses have been concentrated in the private sector as Greece's coalition government caved in to demands to cut civil service jobs, announcing 15,000 positions would go this year, amid mounting international pressure to agree on austerity measures needed to secure major new debt agreements.

While it's true Greek politicians have done virtually nothing to cut the terribly bloated public sector, the reality is that further job cuts on top of savage austerity measures will weaken an already crippled economy.

Moreover, with Bloomberg reporting that two thirds of Greek voters say they won’t vote for New Democracy or Pasok in the upcoming national elections, the country’s two largest political parties and interim government partners, I doubt you'll see politicians talking about massive cuts to the public sector.

Of course, Greece's hand is forced. Whoever wins the next elections won't gain a majority government and they'll still have to push through harsh reforms which include cutting the size of the public sector.

Spain's economy is in the worst shape of any European nation and it still has a lot of falling left to do. Its condition is at least as bad as Greece's was two years ago when the debt crisis began. There is one critical difference between the two though, and it is not a good one. As Spanish Prime Minister Mariano Rajoy said Thursday: "It's not possible to rescue Spain."

The nation is in a recession, has an unemployment rate of 23 percent, and most of its banks could be cast as extras in "The Walking Dead." That is basically what the head of Spain's central bank said earlier this week. "If the economy worsens more than expected, it will be necessary to continue increasing and improving capital as necessary in order to have solid entities," Miguel Angel Fernandez Ordonez told a conference Tuesday. The most optimistic forecasts have the nation's GDP shrinking about 1.7 percent this year.

Spain's banks were crushed by the 2008 crash in real estate prices. As Gavyn Davies noted:

The downward correction in real house prices in the years after the construction bubble was fairly minor, at least by US standards. This has accelerated in recent months, and the renewed recession in 2012 is causing concern that the country's largest banks, which the Bank of Spain has repeatedly said are in good shape, may after all, require further injections of new capital.

Where this new capital is supposed to come from is entirely unknown.

In addition to a lot of bad real estate debt, the banks now also hold a lot of bad Spanish government debt. Since December they have used cheap loans from the European Central Bank to become the primary buyers of Spanish bonds. Spain's banks weren't unique in this. All across the EU, banks with little capital have bought bonds from the very same debt-ridden nations which are supposed to stand behind those banks.

The reason the ECB loaned them the money to buy these bonds is that it was supposed to give them some good assets that might offset all the bad real estate assets. Instead it is has left them with holding bonds where the best case scenario is that they will be worth 70 percent less than face value.

The program under which the ECB loaned this money has come to an end, so the banks no longer have funds to buy the bonds. Because foreign investors recognize a bad deal when they see one, there is little market for the bonds. An auction of Spanish bonds on Tuesday barely sold the minimum amount the government needed. Also, the amount of interest the government must pay is back to the level it was in December. That is right before the ECB started its loan program.

Prime Minister Rajoy is entirely correct when he says it is impossible to rescue Spain. The nation's economy is almost twice the size of Greece, Ireland and Portugal combined. This has left even the experts baffled at what to do. In a speech Thursday, Christine Lagarde, chair of the IMF, actually called on Madrid to do what are essentially two mutually exclusive things: rein in its debt and deficit and not strangle what little economic growth Spain still has.

Not sure exactly how Spain is suppose to implement the IMF's bitter medicine but all this tells me is that the ECB will have to keep its long-term financing operation (LTRO) going to mitigate any possible banking crisis in Spain and spillover effects on the global financial system.

George Soros has warned that the eurozone has entered a "more lethal phase" and outlined a series of measures to solve the crisis - including an idea that all countries should be able to refinance their debt at the same interest rate.

Soros, known as the man who broke the Bank of England by betting that the UK would be forced to devalue the pound during the 1992 currency crisis, said that "far from abating, the euro crisis has recently taken a turn for a worse".

Soros, who is chairman of Soros Fund Management - which in 2011 stopped managing money for outside investors - warned that Europe was facing "a long period of economic stagnation or worse" whether or not the euro endures. He also warned that while countries in Latin America suffered a lost decade after their economic crisis in 1982, the European Union would not survive such an economic malaise.

"The deflationary debt trap threatens to destroy a still incomplete political union," he said in an article published in the Financial Times.

While the European Central Bank's injections of large sums of cheap funding into the financial markets through its long-term financing operation (LTRO) helped to prevent a credit crunch, it failed to solve the underlying problems of the eurozone where the gap between the richer countries such as Germany is widening against the indebted nations such as Greece.

"The crisis has entered what may be a less volatile but more lethal phase," Soros said.

His article has coincided with a sharp change in the mood on the financial markets since the end of the first quarter, when stock markets in the US enjoyed the strongest performance since first quarter of 1998. Since the start of this week, markets have been more cautious, with bond yields in Spain reaching their highest levels in four months on Tuesday amid concern about the scale of the austerity measures being imposed by the government and fears that the country might need a bailout.

Soros argued that the LTRO had made it possible for Spanish and Italian banks to make money on holding their own country's bonds. He said the Bundesbank was right to spot that a indefinite expansion of the money supply was problematic, but by tightening domestic policy it would hurt its eurozone partners who needed the richer country to fuel demand.

His answer to ensure the European Union survives is to "recognise that current policies are counterproductive and change course".

He said that the rules of the eurozone need "radical revision" and suggested that all countries be able to refinance their existing debts at the same rate. He acknowledged that the Bundesbank would not accept his ideas but concluded: "The future of Europe is a political issue. It is beyond the Bundesbank's competence to decide".

I take Soros' stark warnings with a grain of salt because I don't believe the crisis has entered a 'lethal phase'. In fact, I remain bullish on risk assets and think there is still lots of upside in financials, tech, energy and especially in basic materials (check out coal, natural gas metal and mining shares being eviscerated like the world economy fell off a cliff!).

Having said this, I do believe European politicians are once again proving how utterly inept they are in dealing with the crisis in a much more forceful manner. Soros was right to take Germany to task at Davos as they too will suffer a brutal recession if they don't heed his warnings.

Finally, since it is Orthodox Easter, I want to address a topic that gains very little media attention, namely, the role of the Greek Orthodox Church over the last few years in providing relief to many Greeks that have fallen on desperate times.

Last week, I crossed paths with father Lambros Kamperidis, a highly educated Greek Orthodox priest in Montreal and family friend. I told him about an interview I saw on ABC's this Week with pastor Rick Warren last week on Catholic Easter.

TAPPER: This week’s “Newsweek” magazine, which has a very provocative cover, has a different perspective on what ails America’s religious communities, under the headline “Forget the Church, Follow Jesus,” Andrew Sullivan argues that American Christianity is in a crisis, it’s too focused on politics and policy, too little on spirituality. And that’s the same theme that was in this video by Jeff Bethke that was — that went viral earlier this year, with over 20 million views. So what is your reaction to this line of criticism from people who like faith but don’t like religion?

WARREN: Sure. Well, first place, let me give a little personal gripe. I think it’s disingenuous that magazines like “Newsweek” know that their circulation goes up at Christmas and Easter if they put a spiritual issue on the cover, but it’s always bait and switch. They never tell the stories, never tell the stories of what the good — what good the church is doing. Never. It’s always some obscure scholar, who’s debating something that kind of supposedly disproves this or that, or Andrew Sullivan — I don’t consider Andrew Sullivan to be a religious authority, okay?

And so it is — they know they’re going to make money, every time you put Jesus on the cover of a magazine, it skyrockets. You go do the history. “Time” magazine, “Life” magazine, “U.S. News and World Report,” those are always the best issues. So they make money on it, but then it’s a bait and switch, and it’s always a disappointment. And I wish they would have a little bit more integrity than that, and tell the other side of the story, maybe just occasionally.

I agree, the media only focuses on the Church when a scandal breaks out on child abuse but rarely, if ever, covers all the good things that are being done on a daily basis. Father Kamperidis told me that the Greek Orthodox Church now provides meals for over 250,000 Greeks. "And not just any meals, full meals providing them with good nourishment and dignity."

So, the next time your read something negative or cynical on any church, remember that they're only covering the ugly side in a feeble attempt to denigrate Christianity and extort the 'higher virtues' of their secular beliefs. Importantly, you can't separate the Church from Christianity (St-Cyprian famously said: "Habere iam non potest Deum patrem qui ecclesiam non habet matrem").

And as much as I love Bill Maher, I think he's an utter fool when discussing religion or when he recently defended Hilary Rosen, taking stupid swipes on Ann Romney for being a stay at home mother (she suffers from Multiple Sclerosis and is the best thing Mitt Romney has going for himself just like Michelle Obama, whose father had MS, is the best thing President Obama has going for himself).

I have talked at length with him the past year as the disease progressed. It is a truly evil affliction. Mish has stayed the course, working with his wife, and now the options will soon be down to her communicating with a device that follows her eye movements to choose words on a computer screen.

I cannot even imagine the pain of living with a loved one in the condition. Mish is not asking for anything for his family, but he is sponsoring a raffle for ALS research. Please consider buying one or more tickets, or making a small donation to the Les Turner ALS Foundation. The money will go to research to find a cure, so that someday no one has to go through such pain.

Please provide generously as this is a devastating disease. Below, euronews reports on how the economic crisis has overshadowed the Orthodox Easter celebrations in Greece. Also, wish all Orthodox Christians a Happy Easter. Christos Anesti! Kalo Pasxa!

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